Default super: ‘Major funds may be forced to close’

New rules on default super selection will distort the market, and this kind of government interference has gone a step too far, the Corporate Super Specialist Alliance (CSSA) has claimed.

The organisation is so nonplussed by new regulations that are set to be enshrined in law as part of the Fair Work Amendment Bill 2012 that it has made a submission to the Standing Committee on Education, Employment and Workplace Relations aimed at stopping the Bill in its tracks.

One of the key problems, said CSSA President Douglas Latto, is that the new selection process would introduce three layers of bureaucracy – and therefore three layers of costs for funds to bear.

“For a fund to make it through to a modern award, an application to APRA to become a MySuper fund would first have to be made,” he said.

“It would then fall to the Default Selection Panel (DSP) to select which MySuper funds make it through to each modern award. Finally, the bench of Fair Work Australia (FWA) would vet the selections from the DSP. The amount of time and cost involved in this process is considerable.”

“If a fund does not appear in enough modern awards it will be unlikely to survive because it cannot be chosen as a default super fund,” he added. “Major funds may be forced to close. We believe such interference in the market is a step too far for any government.”

The CSSA is also concerned that the DSP will select funds on fee cost rather than value where funds are choosing new investment strategies and there is therefore no investment history to assess.

“Funds that are on the list will wish to remain on the list and will be tempted to make inappropriately short term investment decisions,” said Latto. “This could negatively impact investors in superannuation which is, by its nature, a long term investment.”

He added that the removal of grandfathering from modern awards could also have seriously negative implications for trustees, and that the risks of forcing hundreds of thousands of members to move to alternate MySuper funds include:

Auto acceptance into group life insurance options may disappear, leaving members underinsured. This is particularly problematic for members with pre-existing conditions who are ‘uninsurable’ elsewhere.

Those with life insurance in their existing super fund may end up with reduced cover on transfer to a MySuper fund.

The cost of transferring member funds into MySuper funds will run into the multimillions, a cost which must surely be ultimately borne by the members.

The proactive financial literacy programs that corporate super fund advice specialists currently provide to corporate super fund members may no longer be available

Stating that forcing large numbers of employers to move away from current carefully selected solutions that have been tailored for their workplace “does not make sense”, Latto said that the best solution would be to allow any MySuper fund to be a default super fund.

“If an award limits the choice employers have for their default fund, it reduces their ability to provide the best outcome for their employees,” he said.

“This is clearly anticompetitive and not in anyone’s best interest, other than the fund nominated in the award. If a product is superior, market forces will attract advisers and investors to it.”
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